AMERICAN PERISCOPE. Ends and means

There is a buzz about social business and impact investing in the media. Among recent articles I read, one entrepreneur is helping a farmer create his own dairy unit and biogas plant, and another has developed a welding simulator used to teach people welding which he is taking around to rural areas to encourage youth to take up welding as a profession.

Notable, but why do these qualify as ‘social business’? Perhaps the authors of the articles associate any activity directed at the rural sector as social, for otherwise I do not see anything in the description of these two projects as different from what scores of ‘non-social’ entrepreneurs do. Adam Smith felt profit motive was sufficient for people to sense an unsatisfied demand and fulfil it, creating an unintended ‘social’ benefit. That was his ‘invisible hand.’ Who is to say that an office clerk’s desire for a good motorcycle to get to work is any less social than a farmer’s desire to churn butter out of the milk from his cow?

Mohammed Yunus, founder of the Grameen Group in Bangladesh, gave us two guidelines that we can use to distinguish between a ‘social’ business and a normal business. A social business, he said, needs to address a social problem (poverty, health, education, etc.), and, it should be run on business lines but as a not-for-profit. Thus, the goal is not to maximise profit but to certainly cover costs and not be always dependent on donations for survival (like an NGO) and any surplus is to be invested back in the firm.

The distinction Yunus makes is that of selfishness and selflessness. A normal business is directed at satisfying a user’s need (which may also be a social problem, such as good health), but the person supplying the good or service is selfishly intending to maximise his profit. Adam Smith would have no problem with that. In the case of a social business, while directed at solving a social problem, the provider is selflessly running his enterprise and yet operating it as a commercially viable activity.

In the two reports I just mentioned, there is no indication that the intent is either solving a social problem or they are being run in a not-for-profit manner. Moreover, by associating the powerful term of impact investing in these cases, we are led to believe that the intention is the social impact being made.

Yunus’ other idea of microcredit took off in a big way in India and collapsed in a big way too. The problem was that all small loans were termed microfinancing. Yunus’ original idea was to link microfinance to a social movement that involves forming the borrowers into a small (mostly women’s) group, making them take an oath that included elements related to hygiene and education of their children, and create peer pressure to ensure prompt repayment. Social peer pressure and trust substituted for collateral. The Indian bankers’ version of microfinancing without the social commitment conditions resulted in a high rate of defaults.

CK Prahlad has argued that members of the bottom rung in society are also consumers whose needs can be satisfied with a profit-making intent. The shampoo sachet that sells for ₹1 meets this definition without any need to sacrifice margins. This is different from social business with regard to intent and operational criteria.

The writer is a professor at the Jindal Global Business School, Delhi NCR, and at Suffolk University, Boston

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